Indication of Interest (IOI)
An Indication of Interest (IOI) is a non-binding expression that signals a buyer’s intent to purchase a security undergoing registration (such as before an IPO) or a company in an acquisition process. It communicates serious interest and key parameters but does not create a legal obligation to complete the transaction.
Key takeaways
- IOIs are non-binding and typically used before securities are approved for sale or before formal acquisition negotiations.
- In IPOs, IOIs indicate demand but do not guarantee allocation when demand exceeds supply.
- In M&A, IOIs are often formal letters that outline valuation ranges and deal conditions but stop short of binding commitments.
- A Letter of Intent (LOI) follows IOIs and contains more detailed, negotiated terms; neither IOIs nor LOIs are usually legally binding.
IOIs in securities and IPOs
Before an initial public offering, investors or broker-dealers may submit IOIs to express conditional interest in buying shares once the offering becomes effective. Because selling registered securities before SEC approval is illegal, IOIs:
* Are non-binding and open-ended.
* Require the broker to provide a preliminary prospectus to the investor.
* Typically include the security name, buy/sell indication, estimated share size or capacity, and sometimes a tentative price.
* Are often handled electronically via broker-dealer systems or trading platforms.
* Are usually processed on a first-come, first-served basis, so submitting an IOI does not ensure allocation.
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IOIs in mergers and acquisitions
In M&A, an IOI is generally a concise, non-binding letter from a prospective buyer to a seller that signals genuine interest and frames initial deal expectations. Typical components include:
* Indicative valuation (dollar range or multiple, e.g., $10–15M or 3x–5x EBITDA).
* Suggested transaction structure (asset vs. equity, cash vs. stock, use of leverage).
* High-level milestones and an estimated timeline to close.
* Preliminary due diligence items and a rough due diligence schedule.
* Outline of management post-transaction, including retention plans or roles for current owners.
An IOI sets the stage for negotiations that may lead to a more detailed LOI.
IOI vs. LOI
- IOI: Early, informal, non-binding indication of interest; broad terms and valuation ranges; starts negotiations.
- LOI: More detailed document drafted after initial negotiations; specifies transaction terms and often establishes exclusivity or final negotiation framework; still typically non-binding except for certain provisions (e.g., confidentiality or exclusivity).
Actionable and natural IOIs
- Actionable IOI: Contains specific execution details (security symbol, price aligned with or above the National Best Bid and Offer, size) and can be acted upon by trading systems.
- Natural IOI: Originates from a customer’s interest rather than being generated by a firm; a firm may represent or facilitate this customer interest.
Cancellation and termination
- The buyer who submitted an IOI can cancel it.
- If an IOI remains unconfirmed beyond any applicable confirmation period, it will be canceled automatically.
- Because IOIs and LOIs are non-binding, either party may terminate negotiations at any time unless a binding term has been separately agreed.
Example (illustrative)
A real-world example involved a prospective buyer submitting an IOI that proposed:
* A specific per-share purchase price and an all-cash offer.
* Management retention agreements for key executives.
* Exclusivity until the purchase agreement was executed or the IOI was terminated.
This kind of IOI outlined key deal terms and timelines while stating the non-binding nature of the proposal.
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Conclusion
An IOI is a preliminary, non-binding signal of intent used in both capital markets and M&A to communicate interest and shape early negotiations. It provides useful guidance on valuation and structure but must be followed by further due diligence and more detailed agreements before a binding transaction occurs.